(Bloomberg) -- India's consumers can't be counted upon to spur economic growth through spending as they did before, but their savings can help fund an increase in government borrowings, according to HSBC Holdings Plc.
Rising savings during the nationwide lockdown imposed on March 25 will also help in curtailing India's current account deficit as the need to raise capital abroad diminishes, economists led by Pranjul Bhandari wrote in a report to clients.
Before the pandemic arrived, India's gross savings rate had dipped to a more than decade-low of 30.1% in 2019, down from 37.8% in 2008, as companies, government and the consumers splurged.
“We may actually find financial savings rise through the Covid-19 episode,” Bhandari wrote along with Aayushi Chaudhary. “There are two reasons for this -- with households saturated with debt, they may not want to dip into savings further to fund discretionary consumption. Risk averse banks and shadow banks, too, may not be keen to lend freely.”
As India emerges from one of the world's longest shutdowns to check the pandemic's spread, Prime Minister Narendra Modi is under pressure to spur growth in the economy. Activity came to a standstill as almost all of the nation's 1.3 billion people stayed at home since March-end, setting the economy on course for its first annual growth contraction in four decades.
Consumer confidence collapsed in May with the current situation index touching a historic low while the one-year-ahead future expectations index also recorded a sharp drop, entering the zone of pessimism, the central bank said.
While consumption, which accounts for 60% of the economy, has been the undisputed savior of India's growth during previous stress periods, it's unlikely to do so now, Bhandari and Chaudhary wrote.
That's partly because lenders and shadow banks wary of a surge in bad loans are not extending credit unlike the days that followed the global financial crisis in 2008.
The higher financial savings can be a silver lining in such a scenario.
“No surprise that despite a large borrowing calendar, bond yields haven't spiked,” HSBC economists said.
©2020 Bloomberg L.P.
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